Acquiring a rental property with existing tenants is not only a convenient choice, but also a great opportunity. Skipping renovations, advertising, and tenant screening is just the start of the advantages. That said, it’s vital to understand that purchasing a property with tenants already living there comes with its own challenges. To make the most of this opportunity, you’ll need to learn about the process and what challenges to avoid.
Conducting Due Diligence
The immediate cash flow and turnkey nature of acquiring a leased property can make it seem like a great choice for your next investment. However, don’t assume that a leased property is in good condition or that the tenants are reliable and pay rent on time. Rather, take the time to perform due diligence and ensure the leased property is a worthwhile investment.
One of the primary documents to review when considering a leased property is the existing lease agreement. If you buy a property that has tenants, you automatically assume the lease agreement they signed with the prior landlord.
Given that the lease is binding, you’ll need to follow its terms until it concludes or is due for renewal. In some cases, the tenant agrees to end the lease upon the sale of the property, but this is rare. Most of the time, it’s important to know which existing agreements will govern your new investment.
Assess tenant payment history and lease terms
Besides reviewing the lease agreements, it’s important to conduct a thorough screening of the current tenants before buying the property. Approach the screening as if the tenants were new applicants by performing thorough background and credit checks, and verifying their payment history and references.
Additionally, confirm with the current owner or landlord that the tenant’s security deposit has been paid and is kept in a separate bank account.
Inspecting the property with tenants in place
In addition to tenant screening, you must also conduct a complete evaluation of the property. To fully understand the property’s condition, it’s important to inspect both the house and the yard in person.
With tenants already residing in the home, it’s crucial to be cautious and understand how responsible they are with upkeep and cleanliness. Don’t forget to ask the current owner about any past or present insurance claims, particularly if they were caused by the tenants. Too many prior insurance claims might cause difficulty in getting insurance coverage for the property after the purchase.
If everything looks good, you might have discovered a great rental property with tenants in place. Tenant-occupied or not, your new property must be kept in livable condition, with safe, functional electrical and plumbing systems, and structurally sound buildings. Though your new rental property may come with tenants, once the sale is finalized, you take full responsibility for managing and maintaining it.
Managing a property can be quite demanding, particularly if you handle everything yourself. Why not let the experts at Real Property Management Chicago Group handle your daily property management tasks? For more information about our property management services in Orland Park and nearby, contact us today or at 312-265-0660.
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